Since many states face a highway funding crisis, some state governments and the federal government are considering proposals to sell highways to private investors. This goes against the the conventional wisdom that roads should be built and maintained by government and funded by taxes. Conventional wisdom, taught in many introductory economics courses, is that roads are public goods. One definition says a good is public if the cost of excluding people who don't pay for using the good is unacceptably high. If someone builds a road with lots of access points it would be very costly to exclude people who do not pay for it from using the road.

When thinking about charging people to use roads and highways, most people think of tolls. Private firms can and do manage toll highways. Although tolls may work for a few limited access highways, the cost of collecting tolls from the driver of each passing vehicle would likely outweigh the benefits for most roads and streets, which have numerous access points that are close together. But this does not mean that it would be infeasible to privately operate such roads and streets. Tolls are not the only way to charge people for the benefits they get from roads. Residents and business owners could be charged a fee for access to the road or street on which their homes or businesses are located. They could also be required to purchase a license to drive on the roads within a given jurisdiction.

Modern electronic technology makes it possible to charge people for using roads and highways without costly delays associated with collecting tolls manually.Yet even without modern electronic technology, private roads and streets were much more common in the past than they are today. In Britain, roads and highways were built and maintained by monasteries during the Middle Ages. Guilds invested in the construction and maintenance of turnpikes as late as the eighteenth century. Approximately 10,000 miles of private turnpikes were built in the US during the early 19th century. Private investors abandoned most of these when competition from government subsidized canals and railroads reduced their ability to earn enough in tolls to cover expenses.

Most private turnpikes were not profitable for their investors. Investors were often local merchants who would profit from additional traffic attracted by turnpikes. Thus they were willing to invest even though revenues from tolls did not generate a decent return. Private streets were also common in some US cities during the 19th century. Private streets were not supported by tolls, but by an assessment on residents located along the streets.

The paucity of private roads cannot be taken as proof that such roads would not be built in the absence of government subsidies. Few private highways exist because they cannot compete with government subsidized highways. Given the choice between paying a toll to drive on a private highway driving on a government highway at no charge, most drivers would rather drive on government highways than private highways, even if private highways were better quality and had less congestion.The result is a very inefficient system of roads and highways that are more costly than necessary with serious congestion problems in many cities.

Without competition from free highways subsidized by the government, people would be willing to pay to use highways. If the system of roads were sold to private entrepreneurs, they would find creative ways to fund them, just as they did at various times in the past. Whether it be local community associations or merchant associations who collect a fee from their members in exchange for building and maintating roads, or corporations who limit access to expressways and charge toll, people will pay for the use of roads and highways because they value mobility. Furthermore, expressway congestion could be reduced or eliminated by charging drivers prices that vary to reflect the scarcity of highway space during different times of the day. The revenue earned could be used to expand highway capacity in the most heavily traveled routes, thereby enhancing mobility, which in turn promotes widespread employment and prosperity.

Monday, January 10, 2011

Private Roads and Highways- Why not?

Since many states face a highway funding crisis, some state governments and the federal government are considering proposals to sell highways to private investors. This goes against the the conventional wisdom that roads should be built and maintained by government and funded by taxes. Conventional wisdom, taught in many introductory economics courses, is that roads are public goods. One definition says a good is public if the cost of excluding people who don't pay for using the good is unacceptably high. If someone builds a road with lots of access points it would be very costly to exclude people who do not pay for it from using the road.

When thinking about charging people to use roads and highways, most people think of tolls. Private firms can and do manage toll highways. Although tolls may work for a few limited access highways, the cost of collecting tolls from the driver of each passing vehicle would likely outweigh the benefits for most roads and streets, which have numerous access points that are close together. But this does not mean that it would be infeasible to privately operate such roads and streets. Tolls are not the only way to charge people for the benefits they get from roads. Residents and business owners could be charged a fee for access to the road or street on which their homes or businesses are located. They could also be required to purchase a license to drive on the roads within a given jurisdiction.

Modern electronic technology makes it possible to charge people for using roads and highways without costly delays associated with collecting tolls manually.Yet even without modern electronic technology, private roads and streets were much more common in the past than they are today. In Britain, roads and highways were built and maintained by monasteries during the Middle Ages. Guilds invested in the construction and maintenance of turnpikes as late as the eighteenth century. Approximately 10,000 miles of private turnpikes were built in the US during the early 19th century. Private investors abandoned most of these when competition from government subsidized canals and railroads reduced their ability to earn enough in tolls to cover expenses.

Most private turnpikes were not profitable for their investors. Investors were often local merchants who would profit from additional traffic attracted by turnpikes. Thus they were willing to invest even though revenues from tolls did not generate a decent return. Private streets were also common in some US cities during the 19th century. Private streets were not supported by tolls, but by an assessment on residents located along the streets.

The paucity of private roads cannot be taken as proof that such roads would not be built in the absence of government subsidies. Few private highways exist because they cannot compete with government subsidized highways. Given the choice between paying a toll to drive on a private highway driving on a government highway at no charge, most drivers would rather drive on government highways than private highways, even if private highways were better quality and had less congestion.The result is a very inefficient system of roads and highways that are more costly than necessary with serious congestion problems in many cities.

Without competition from free highways subsidized by the government, people would be willing to pay to use highways. If the system of roads were sold to private entrepreneurs, they would find creative ways to fund them, just as they did at various times in the past. Whether it be local community associations or merchant associations who collect a fee from their members in exchange for building and maintating roads, or corporations who limit access to expressways and charge toll, people will pay for the use of roads and highways because they value mobility. Furthermore, expressway congestion could be reduced or eliminated by charging drivers prices that vary to reflect the scarcity of highway space during different times of the day. The revenue earned could be used to expand highway capacity in the most heavily traveled routes, thereby enhancing mobility, which in turn promotes widespread employment and prosperity.